Fool.com: Disrupting the Publishing Industry [Rule Maker] February 3, 2000

RULE MAKER PORTFOLIO
Disrupting the Publishing Industry
The publishing-on-demand model

By Rob Landley (TMF Oak)
February 3, 2000

In a previous article, I wrote about how a computer's ability to infinitely and instantaneously copy digital information naturally commoditizes any information that can be expressed in digital form. A company can sue a competitor that's illegally profiting from its proprietary intellectual property, but can't pragmatically do very much about customers sharing copies with each other for free, no matter what the law says about it. This exerts tremendous market pressures on companies that deal in information, severely reducing the profitability of the "proprietary product" model and pushing them towards a service model as a data supplier.

In other articles, I wrote about the way the established music industry, movie industry, and software industry have all been forced to respond to this, usually by kicking and screaming and trying to take their ball home.

For the sake of completeness, let's take a look at the publishing industry. Surprisingly, the majority of the publishing industry seems to be acting like adults on this one. So far, anyway. :)

Magazines (or "periodicals," as the librarians prefer to call them) have generally taken to the Internet pretty smoothly. They're used to their product having an expiration date right on the cover, after which old issues get thrown out. Magazine piracy usually isn't that much of a problem, because by the time anybody gets around to copying it, the publisher is no longer selling that issue anyway.

Just as importantly, publishing periodicals online cuts out the printing costs completely, which is a BIG WIN. Paper and printing can be expensive, often costing more than the cover price of the magazine. (Just go down to Kinko's and ask. Bulk printing is a little cheaper, but not much.) Without the income from advertising, most magazines would lose money on every issue.

Publishing online allows articles to produce advertising revenues without a huge up-front investment in paper and ink inventory. Each banner ad view (and especially every time someone clicks on a banner ad to view the site behind it) is counted, and the site's advertising revenues come from those page views. For example, the article you're reading right now is mostly paid for in this way.

Publishing online also has the fringe benefit that older material can hang around at no added expense, still generating whatever advertising revenues it can. The Fool does this, too. We have an archive of older RM articles online dating back to the MakerPort's founding in February 1998. Speaking of which, we just turned two years old -- happy birthday to us! For archives of all of our Foolish features, see our Fool Archives.

By not charging access to the website, a periodical publisher like The Motley Fool (or Newsweek, or CNN, or anybody) honestly can "compete with free." Why e-mail copies to your friends? Just send them a link to the article online. (Or, in the case of Motley Fool content, an even easier solution is just to click the "e-mail this page to a friend" link at the end of the column.)

Book publishers are in a slightly different position. Books are much bigger than most magazines, and not usually broken into individual articles. A paper book is much more portable and convenient than sitting at a desk reading a page at a time from the Internet, or using a portable device with a three hour battery life. A traditional book also wins in the eyestrain category compared to any electronic counterpart yet developed. As of this moment, the paperless book is about as feasible as the paperless office.

The revenue picture for books is different, too. Black-and-white printing on newsprint costs 1/100th as much as color printing on glossy paper, so while generating inventory is still expensive, the traditional revenue model does not include advertising. They sell each book as a product, and the money from that sale pays for everything.

A good book can sell copies steadily for months, years, even decades. Yet books are physical inventory and take up space, and most books have a large surge of sales when they're first introduced, then gradually level off to a much lower level of sales after that. A bookstore owner's job is to stock what sells, and get rid of what doesn't. Every year, thousands of books are returned to publishers as a waste of inventory space, and since paperbacks cost almost as much to ship as they do to produce, standard practice is to tear the front cover off and send that back to the publisher for a refund (well, credit towards ordering future books), and destroy the rest of the book. (Of course some of these "destroyed" copies wind up being sold coverless at flea markets. What's capitalism without a black market?)

So, the traditional book-printing strategy has been to print a huge number of books all at once in order to achieve economies of scale. Next, they ship out as many as bookstores can hold, then warehouse the rest in anticipation of future demand. If demand is still sufficiently high when the inventory runs out, they set up the presses again and do another print run.

The publisher's problem is inventory that needs to be stored, perhaps forever. And the tendency of bookstores to lose patience with unsold books and destroy them for refunds eats into the bottom line as well. These are of course the costs of doing business, but that just means it's a problem nobody's solved yet.

The publisher's reaction to inventory is to only print as much as they can be sure of selling, meaning that by the time the third book of a series hits the shelves, the first book is no longer available. A publisher would rather have unmet demand than unsold books, which is great for the publisher but not much fun for the readers.

Bulk online booksellers like Amazon were the first step towards the solution, because they don't have to store much inventory themselves, instead they can contact the publisher once a customer has placed an order and have the book shipped straight from publisher to customer. Publishers like this because they never have to issue refunds for destroyed inventory. Readers like it because they don't have to scour a dozen stores to find one that still has a copy of the book they want.

The second half of the solution presented itself as a disruptive technology: on-demand publishing. Using a fairly standard Xerox or Canon high-end laser printer and a finishing unit, you can turn a printout into a hardcover book, complete with (digitally printed) color cover. This isn't as cheap as doing bulk printing of tens of thousands of copies of the same book from plates, but the advantage is that the book isn't printed until a customer pays for it. All the inventory is electronic!

Because this publishing-on-demand model was a more expensive way of printing, the major publishers completely ignored it at first (and are still quite tepid about adopting it outside of their academic textbooks divisions). But the publishing-on-demand printing model has been embraced by small "vanity" presses like www.xlibris.com, www.1stbooks.com, www.toexcel.com, www.trafford.com, and a hundred others, which are starting out by serving authors with smaller audiences than the major publishers are interested in.

Publishers trying to please Wall Street have focused on their top-performing artists and titles. Yet where do tomorrow's top performers come from but today's "B list"? The consolidation of music publishers has pushed out the up-and-coming singers and driven them towards MP3s. The consolidation of the movie industry led to the rise of independent films (which are now, as often as not, delivered online via streaming video). Software went online a long time ago. And now, aspiring authors look to on-demand publishing if they ever want to stay in print long enough to find an audience.

Disruptive technologies tend to replace old economic models with new ones, and in the process replace old companies with new ones. If you haven't grabbed a copy of The Innovator's Dilemma yet, check it out. What it talks about is going on all around us, and it affects both Rule Breakers who use these technologies as weapons, and the Rule Makers which wind up on the receiving end.

- Oak


 




Rule Maker Portfolio

2/3/00 Closing Numbers
Ticker Company Dly Pr Chg Price
AXPAMER EXPRESS-1 5/16$162.88
CSCOCISCO SYSTEMS15/16$117.81
GPSGAP INC1/16$52.88
INTCINTEL CORP1/8$104.19
KOCOCA-COLA CO-1 1/8$55.25
MSFTMICROSOFT CORP13/16$103.63
PFEPFIZER, INC-3/8$35.63
SGPSCHERING-PLOUGH3/4$46.75
TROWT.ROWE PRICE ASSOC-1 3/16$38.44
YHOOYAHOO INC32 1/4$360.25

  Day Week Month Year
To Date
Since
2/2/98
Annualized
Rule Maker 3.45% 8.68% 5.52% 2.11% 77.96% 33.32%
S&P 500 1.12% 4.76% 2.19% -3.01% 45.36% 20.52%
S&P 500(DA) 1.12% 4.76% 2.19% -3.01% 47.13% 21.25%
S&P 500(DCA) n/a n/a n/a n/a 29.00% 13.55%
NASDAQ 3.36% 8.33% 6.87% 3.48% 160.04% 61.10%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
6/23/9875CSCO32.865$117.81258.48%
2/17/9916YHOO126.309$360.25185.21%
5/1/9882GPS22.708$52.88132.85%
2/3/9859MSFT49.352$103.63109.97%
2/13/9865INTC53.762$104.1993.79%
5/26/9818AXP104.067$162.8856.51%
2/3/9866PFE27.433$35.6329.86%
2/3/9856TROW33.673$38.4414.15%
8/21/9844SGP47.993$46.75-2.59%
2/27/9827KO69.107$55.25-20.05%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
6/23/9875CSCO$2,464.86$8,835.94$6,371.08
2/17/9916YHOO$2,020.95$5,764.00$3,743.05
2/13/9865INTC$3,494.54$6,772.19$3,277.65
2/3/9859MSFT$2,911.79$6,113.88$3,202.09
5/1/9882GPS$1,862.06$4,335.75$2,473.69
5/26/9818AXP$1,873.20$2,931.75$1,058.55
2/3/9866PFE$1,810.58$2,351.25$540.68
2/3/9856TROW$1,885.70$2,152.50$266.80
8/21/9844SGP$2,111.70$2,057.00($54.70)
2/27/9827KO$1,865.89$1,491.75($374.14)
  Cash: $6,133.67  
  Total: $48,939.67  


Notes
The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.